Economics in Two Lessons, Chapter 6

by John Quiggin on March 22, 2018

Thanks to everyone who the first five chapters of my book, Economics in Two Lessons. Now here’s the draft of Chapter 6: The opportunity cost of destruction This is the last part of the book devoted to Lesson 1 Market prices reflect and determine opportunity costs faced by consumers and producers. and the one where I agree mostly with Henry Hazlitt’s Economics in One Lesson. It seems particularly apposite 15 years after the beginning of the Iraq War.

As usual, I welcome comments, criticism and encouragement. I’d appreciate any comments on/ alternative suggestions for the opening quote – it’s not a perfect fit, but the best I could come up with.

The book so far is available
Table of Contents
Introduction.
Chapter 1: What is opportunity cost?
Chapter 2: Markets, opportunity cost and equilibrium
Chapter 3:Time, information and uncertainty
draft of Chapter 4:Lesson 1: Applications.
draft of Chapter 5: Lesson 1 and economic policy.

Feel free to make further comments on these chapters if you wish.

{ 15 comments }

1

Anarcho 03.22.18 at 9:22 am

Also, does not Bastiat and Hazlitt ignore the use of credit and the role of banks? Sure, they may need to draw $50 from their bank account to pay for the new window — but what if they arrange credit? Unless you subscribe to the false notion that banks simply loan their savings (Keen’s “Debunking Economics” has a good discussion on this) as Bastiat and Hazlitt do, then the notion that $50 is not being spent on other products is hard to maintain.

I have always found it strange that the likes of Bastiat and Hazlitt (and the “Austrian” school) seek to regulate capitalists and stop them making profits meeting consumer demand — if they are bankers. It is also strange that the “Austrian” business cycle theory is based on notions like a “natural rate of interest” which is an equilibrium notion, something they claim to reject.

So, in short, a discussion of how credit actually works in a capitalist economy may be of benefit here — for the example assumes a “loanable funds” theory of banking, which is NOT how banking works in a real capitalist economy.

2

stostosto 03.22.18 at 11:50 am

“We all want to change the world
But when you talk about destruction
Don’t you know you can count me out”

You know what they say: if there’s a Beatles quote, go with the Beatles quote.

3

marcel proust 03.22.18 at 12:24 pm

Must be a really important chapter to be repeated! (Or is it just the post about the chapter that is repeated?)

4

marcel proust 03.22.18 at 12:33 pm

Apropos the opening quote: IIRC, I suggested the Samuelson quote to you, JQ, when you were first developing the material for the book, so my vanity suggests (strongly) that you stick with that one. If it turns out that my memory is in error, do whatever you think best.

5

nastywoman 03.22.18 at 8:59 pm

As ‘opportunity cost of destruction’ is kind of my… ’hobby’ – and as the glazier’s fallacy – might be… perhaps a bit dated? – wouldn’t it be possible to use a much more ’current’ example?

Like an idea which also always seems to be immensely popular among both admirers and critics of markets: ‚The Trade War’.

And as there is no really ‘big war’ in sight -(if Von Clownstick and the ‘Rocket Man‘ behave) – there is about the Trade War this wonderful absurd example of my friend Dean Baker on his Beat the Press Blog.
As just today he criticized the NYT again for ”complaining about China’s “theft” of intellectual property, while telling readers about how Trump’s proposed tariffs show his: “resolve to turn away from a decades-long move toward open markets and integrated world economies and toward a more starkly protectionist approach that erects barriers around a Fortress America.“
– and Baker concludes:
”While we are supposed to be alarmed about tariffs of 10 percent and 25 percent on steel and aluminum, patents and copyrights are effectively tariffs of many thousand percent, often raising the price of protected items tenfold or even a hundredfold. The economic impact of increased protectionism of this type has been enormous.
This can be seen clearly in the case of prescription drugs, where spending went from around 0.4 percent of GDP in the 1960s and 1970s to 2.4 percent of GDP ($450 billion) in 2017.

Now doesn’t that sound… awesome?- as the ”opening salvo” for a truly sophisticated war parable of the 21th about opportunity costs’ –
Especially since Mr. Baker concludes:
’If China could make free use of technology then we would be able to get artificial intelligence, robots, and other cutting edge technologies at much lower costs than if the protectionists have their way’’

HOW… revolutionary?!

BE-cause IF we would give China ALL of our patent and copyrights and thusly they could produce EVERYTHING what we consume – that would make life so ‚cheap’ for US – that we probably (again) could afford our rents and especially the outrageous costs for educating our young –
in order that the young come up with more patent and copyrights – we could hand over to the Chinese – and thusly we could totally destruct any manufacturing in the US -without having to fire one single shoot of a ‘’conventional war’’.

AND if we also could force the Germans and the Japanese to give their technological knowledge and their patents to the Chinese – for less dough – or actually ”for nothing” – AND then have the Chinese produce ALL of this currently so expensive ”stuff” we like to import from Germany and Japan we wouldn’t have to worry about opportunity costs at all anymore – and especially NOT about that ‚terrible’ Trade Deficit.

AND on top of it – WE – the so called advanced economies wouldn’t need ANY ‚‘workers’’ anymore to do the very difficult and totally annoying ‚‘producing thing – and OUR ‚people‘ could fully concentrate on servicing OUR Rich?

Now – wouldn’t that be… Super… cool?

So just head over to Deans Blog – as there might be even more great current fallacy examples?

6

Robert 03.22.18 at 10:26 pm

Paying a given dollar amount for glass might not employ as many workers as would have been employed if that same dollar amount on clothes. There’s something called the employment multiplier, which is calculated from Leontief input-output matrices.

This objection to Bastiat is independent of complaints that he assumes Say’s law. J. S. Mill has a section, Demand for commodities is not demand for labour, in his Principles, along these lines.

7

John Quiggin 03.22.18 at 10:43 pm

Comment from Philip taken from duplicate post

The section on the Vietnam War reads as though spending on the war was the only factor leading to inflation at that period, instead of being just one contributory factor, that was transmitted to inflation through a reluctance to fund it via taxation. What about oil shocks or countries not at war with higher inflation rates at that time?

For the opportunity cost of war if the threat is perceived as an existential one to the state, way of life, values, rights, freedoms etc. then the opportunity cost calculation will be changed. The cost of not responding would be higher than the injuries, deaths, damage to property incurred and I don’t know if a monetary value could be assigned, WWII would be the case that springs to mind where this would apply. Of course just because is perceived as existential does not mean that it is (‘they want to impose shariah law here’) or that war is the best way to respond to the threat.

8

John Quiggin 03.22.18 at 10:53 pm

Thanks to everyone who has commented

Anarcho @1 Good points. I don’t want to put too much stress on the Austrians, since the book is largely aimed at neoclassical One-Lesson economists. I had a good go at Austrian Business Cycle Theory in Zombie Economics

Stososto @2 I like it

Nastywoman @3 I’ll cahse the Baker article

Marcel P @4 Thanks again for the Samuelson quote. I’m using it first, in the Preface. I liked it so much, I decided I would have a quote to begin every chapter.

Robert @6 A good point, but complicates the argument too much I think

Phillip @7 I didn’t mean to give the impression that Vietnam war spending was the sole cause of the inflation. I’ll redraft on this. On existential threats, that changes one side of the equation, but it doesn’t turn costs into benefits.

Also, apologies to all for the dual post. I accidentally published when I meant to save a draft. It’s deleted now.

9

Peter T 03.23.18 at 7:31 am

I agree whole-heartedly agree with the conclusion but still find the central reasoning unconvincing, because I think it does not connect with the way people think about war (natural disasters are in another category).

War – organised violence – is a large territory, very little of which is covered by calculations of material gain or loss. Often it is not motivated by calculation at all, and a demonstration that it does not pay is beside the point. When people think about past wars, though, they very often see them as in some sense necessary, as dramas of creative destruction. The value is in breaking an old order that a new might be built, much as we have to demolish old buildings (not that most wars achieve this).

To refute this, you need to demonstrate not that the wars were costly, but that there was some less costly path to the same end. Not just that slavery in the US could be ended without war, or Nazism, but that the US could be built without war, or Britain, or Australia, or any state at all now existing, or indeed any complex social order now existing. I agree we desperately need to find some better way, but it won’t be done through more accurate accounting.

The lesson is not that we miscalculate but that, if calculation applied in this area, we would not be here at all.

10

nastywoman 03.23.18 at 9:26 am

@8

Thank You and aren’t there the most… fascinating opportunity costs in Trade Wars?! –

As how much does it really cost to announce (for example) to put tariffs on the aluminum and steel exports of your ”besty, besty friends” – and then when your friends… ”throw up” you take it back again – in order to… perhaps put them back again – if and… perhaps?… and it depends? on… ??
or how nice they will be to US??
– or just to ME?
– and anywhoo – isn’t this ”tariffs thing” really really… complicated – nearly as complicated as this health care thing and all of economix anywhoo??!

11

nastywoman 03.23.18 at 11:59 am

@
”I think it does not connect with the way people think about war (natural disasters are in another category).”

Agreed – as the point of the glazier fallacy is the point that –
”A young hoodlum, say, heaves a brick through the window of a baker’s shop” and that the opportunity costs of such willful destructive ”destruction” might pay – but actually don’t.

But how often are ”real war’s waged” with such (economical) calculations?
-(Or only nowadays by some very very sophisticated-evil F…faces?)

12

Stephen 03.23.18 at 1:44 pm

Anarcho@1: I may be missing the point, but if someone pays for a broken window with a bank load, won’t they have to pay back that loan (with interest) using money that, if the window had never been broken, could have been used for buying something else?

13

Stephen 03.23.18 at 1:44 pm

loan not load obviously

14

Sebastian H 03.24.18 at 3:17 pm

I don’t understand how the bank loan idea changes anything interesting about the parable. The loan has to be repaid. If the glass had not been broken, the loan wouldn’t have to be repaid and the repayment money could be used on something productive instead of remaking a window you already owned. It seems like the only thing the loan does is make things worse in the context of the parable—as now the window owner needs to pay interest on the loan as well.

In fact doesn’t introducing the loan to the parable reveal the interesting fact that destruction is bad for the system (opportunity costs) but maybe good for the loan maker? I say maybe because I can’t decide if the banker would just make a more productive loan outside of the destruction of the window. If they would, then introducing the loan doesn’t change the parable at all—the loan is just another example of an unproductive good that would have been productive if not for the broken window.

15

nastywoman 03.25.18 at 10:47 am

@
”…reveal the interesting fact that destruction is bad for the system (opportunity costs)”

As there are some theories that -(for example) Germany owes it’s Wirtschaftswunder -(economical growth) after WW2 to the (helpful?) complete destruction of an outdated and ineffective manufacturing infrastructure –
and that the possibility ”to start totally new” – was a far better decision than to keep on working with outdated machinery -(or ”worst” for so called ‘reparations’ take the old German machinery to France and keep on working with it) – there are still some (sick?) theories in the heads of some people – that ”complete destruction” might offer:

”A wonderful new start.”

Not unlike the idea of some of my fellow Americans that we first had to erect Von Clownstick -(in order to burn the whole place down – not caring about any ”opportunity costs)
AND then – but only then – a new and brighter future lies in from of US!

Comments on this entry are closed.